May 12, 2015

There is No Such Thing as Free

When our children were in High School, I strongly suggested they both take an economics class. Our daughter came home one day and announced at the dinner table

Dad, we learned something important today in Economics Class. Whats that dear?, I said, knowing the answer.There's no such thing as free she said.

In finance, There is No Such Thing as a Free Lunch (TANSTAAFL) refers to the opportunity cost paid to make a decision. The decision to consume one product usually comes with the trade-off of giving up the consumption of something else.

In a recent conversation, I was introduced to the notion of Extreme Contracts,

Very short iterations, usually one week.

A flat fee for every iteration.

Money back guarantee.

The first bullet sounds like a good idea, provided one week can actually produce testable outcomes. The second bullet means that the variable will be the produced outcomes, since the probability that all work is of the same size, same risk, same effort is likely low on any non-trivial project.

The last bullet fails to acknowledge the principle of lost opportunity cost. This is the there is no such thing as free. When the delivered software is not what is needed, the cost of the software in Extreme Contracts, is free. But the lost capabilities in the time frame they are needed is not free. It has a cost. This is the Opportunity Cost that is lost.

The basis of good project management, and especially in our domain, using Earned Value, depends on providing the needed capabilities at the needed time for the needed cost. Baked into that paradigm is all the cost, planned upfront with the appropriate confidence levels, alternative assessment, and margins and reserves. The discovery cost, risk mitigation cost - both reducible and irreducible - and the cost recovery for productive use of the delivered product or service on the planned date for the planned cost.

This is the foundation of Capabilities Based Planning used in enterprise IT and software intensive systems development.

Comments

When our children were in High School, I strongly suggested they both take an economics class. Our daughter came home one day and announced at the dinner table

Dad, we learned something important today in Economics Class. Whats that dear?, I said, knowing the answer.There's no such thing as free she said.

In finance, There is No Such Thing as a Free Lunch (TANSTAAFL) refers to the opportunity cost paid to make a decision. The decision to consume one product usually comes with the trade-off of giving up the consumption of something else.

In a recent conversation, I was introduced to the notion of Extreme Contracts,

Very short iterations, usually one week.

A flat fee for every iteration.

Money back guarantee.

The first bullet sounds like a good idea, provided one week can actually produce testable outcomes. The second bullet means that the variable will be the produced outcomes, since the probability that all work is of the same size, same risk, same effort is likely low on any non-trivial project.

The last bullet fails to acknowledge the principle of lost opportunity cost. This is the there is no such thing as free. When the delivered software is not what is needed, the cost of the software in Extreme Contracts, is free. But the lost capabilities in the time frame they are needed is not free. It has a cost. This is the Opportunity Cost that is lost.

The basis of good project management, and especially in our domain, using Earned Value, depends on providing the needed capabilities at the needed time for the needed cost. Baked into that paradigm is all the cost, planned upfront with the appropriate confidence levels, alternative assessment, and margins and reserves. The discovery cost, risk mitigation cost - both reducible and irreducible - and the cost recovery for productive use of the delivered product or service on the planned date for the planned cost.

This is the foundation of Capabilities Based Planning used in enterprise IT and software intensive systems development.